Arbitration: Not Sexy, But Important

An arbitration hearing is basically a fancy performance review – few want to do it, few want to hear about it besides your friends and family and someone is bound to leave angry, and as a result, some teams will avoid it at all costs. Nonetheless, arbitration is important for the whole industry. The fact that comparable players form the basis of the system makes each and every case important. And since cases that go to a hearing make for the best comps, and comps are only relevant for a short time, each and every case that goes to a hearing has the potential to set precedent.

The exchange deadline is key. If team and player reach the exchange deadline without a deal in place, they have to now be prepared to move to a hearing, and the number they file at will be crucial in determining whether or not they move to that hearing, with the midpoint between the two numbers being the most important number. Sort of like bidding on a job, you have an idea of what your competitor’s figure might be, but you can’t know for sure until after your decision has been made. Once the numbers are filed, the midpoint between the two is the only number that matters. The team’s obligation is to prove that the player is worth one dollar less than the midpoint, with the player and his agent (and/or counsel) trying to prove he is worth at least one dollar more. The way they do this is through comparable players. Filing numbers are strategically positioned to get the most comparable players on their side of the midpoint. Once it is discovered which side won this little dance, it can become plain who would have the advantage in a hearing, and thus it becomes easier to settle.

When a player and team settle after the exchange but before a hearing, it will almost always be at the midpoint or below. The 20 players who have settled during this timeframe this season, the most recent of whom were Hong-Chih Kuo and Francisco Liriano, settled for an average of $282,700 under the midpoint. But this is skewed low by the multi-year deals signed by Billy Butler, Johnny Cueto, Wandy Rodriguez, Jason Hammel and R.A. Dickey, as these multi-year deals are structured to reflect the player’s salary had he gone through the arbitration process. Taking out those players, the 15 who have settled reached their agreement at an average of $30,266.67 under the midpoint – seven under the midpoint, three at the midpoint and five over. They ranged from Frank Francisco’s deal, which was $187,500 under the midpoint, to Mike Napoli and Miguel Montero, who each signed for $100,000 over the midpoint. But don’t be fooled. Just because these players are signing underneath the midpoint doesn’t mean they aren’t getting significant raises – their average salary increase was 155%.

More often than not, the teams that move to the exchange and hearing stages are those with lower tier payrolls. There were 26 hearings from 2007-2010. Taking teams’ average Opening Day payrolls from those seasons, 16 of the hearings have been with teams whose payroll ranked in the lower half, with 14 hearings between the teams who were in the bottom five in payroll – Washington (6), San Diego (1), Tampa Bay (3) and Florida (4). And of the 10 hearings from the teams in the top half in average payroll, three of them came were Houston’s, the home of long-time executive Tal Smith. If there was a godfather of the arbitration process, it would likely be Smith. His privately-run Tal Smith Enterprises has consulted on arbitration cases for a number of teams, and TSE’s statistical definition of a relief pitcher’s role is that which is most commonly used in hearings. It’s not a coincidence that the Astros won their three cases. Remove those from the equation, and the difference is a bit more stark – 16 for low-revenue teams, 7 for high-revenue. Of the teams that have gone to hearings, the only club that has been particularly unfortunate is the Marlins. In the past four seasons, Florida has gone to a hearing four times and lost three of them, most notably against Miguel Cabrera in 2007. As a first-time eligible player, Cabrera filed at $7.4 million, with the Marlins at $6.7 million, leaving themselves little midpoint breathing room, and making it easier for Cabrera’s side to win. Faced with a potential payout of $10 million or more heading into 2008, the Marlins chose instead to ship him off to the Tigers in a deal that ultimately netted them very little.

Arbitration isn’t sexy, and chicks very likely do not dig arbitration, but it is important. With the hearing deadline drawing near, we will soon know who will go to a hearing, and who will be setting precedent for next season.